Accounting Treatment and Disclosure of Settlement Guarantee Mechanism (SGM) Under Ind AS Framework

The Settlement Guarantee Mechanism (SGM) is a framework established to ensure liquidity in payment settlements by requiring Member Banks to contribute collateral. These contributions form the Settlement Guarantee Fund (SGF), which is held and invested in fixed deposits by a non-profit entity managing retail payments and settlements. The purpose of these investments is to generate interest income, which is then used to cover settlement-related expenses, including costs associated with maintaining liquidity and ensuring smooth financial operations.

The key issue revolves around the accounting treatment of these transactions, particularly how the collateral contributions and related investments should be classified in financial statements. Concerns have been raised about whether recording collateral contributions as liabilities and related investments as assets accurately represents the financial position of the entity. This document examines these concerns and explores the need for alternative accounting treatments or enhanced disclosures to improve the clarity and reliability of financial reporting.

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